Obamacare for Law Firms

Riding the train to NYC and this is my first attempt to complete to complete on my Smart phone. Yes, I know it is an oxymoron for me to use anything with the word “smart” pertaining to myself.

The level of hysteria and propaganda has reached epic proportions. I find myself unable to listen to anything about Obamacare on TV or the radio. It is truly nauseating listening to either side. It is my understanding that the Department of Defense Language Institute is offering a quick immersion class in Doublespeak, the official language of government!

There is more than enough blame to go around. But here is the point, it is the law of the land. The only question that matters is not whether the republicans should one more time (41st time) to repeal Obamacare but how can you make the law work for your benefit as the owner of a small or medium law firm can benefit from the law.

Here is the Plan and rationale. Drop your group health insurance effective January 1, 2014. Have your employees apply for individual coverage on the health insurance exchange effective January 1, 2013. Tax subsidies become available January 1, 2014. Coverage is available without medical underwriting

Individuals will qualify for subsidies under two conditions:

(1) The insured’s “household income” has to be less than 400% of the federal \poverty level. For 2013, the FPL is $23,550 for a family of four, which means subsidies are available for incomes up to $94,200. “Household income” includes income from the employee, employee’s spouse, and any dependents.

(2) Second, if the employee has an employer who offers coverage, the employee’s share
of the premium has to be more than 9.5% of your household income. So, if the employee’s household income is $50,000, and the premium is more than $395.83/month, the employee will qualify.

The goal of the subsidy is to make sure the individual does not spend an unreasonably high percentage of personal income on health insurance. The range is 2 percent of income up to 133 percent of the FPL and 9.5 percent at 400 percent of the FPL. The subsidies are based on the cost of a “silver” plan. Premium will vary according to where the employee lives, and the subsidies will always cap your premium at the appropriate percentage.

An Example

A law firm in Dayton, Ohio previously provided group coverage for his existing 22 employees. The monthly premium under the existing group was $23,900 per month or $1,086 per employee. Family rates were as high as $2,100 per month, Individual rates were as high as $762 per month. The existing plan had co-payments up to $1,000/$2,000 Out-of-Pocket. The average age of employees is 45 with a $70,000 average salary.

The premium under Obamacare for a family of four (age 45) including two children is outlined in this paragraph. The average salary is 297 percent of the federal poverty level. The unsubsidized premium is $8,737 or $728 per month for Bronze level coverage. The maximum percentage of income to be spent on health insurance per employee is 6.84 percent. The employee’s cost for coverage after subsidies is $4,790 or $399 per month for Bronze coverage. The cost of the Silver Plan is $10,541 or $6,595 after subsidies. The monthly premium after after subsidies is $550 per month.

The cost savings are $7238 per month or $86,856 per year.

The law firm provides a MERP annual benefit equal to $5,000 for out of pocket reimbursements for each employee. Each reimbursement is tax deductible to the law firm and non-taxable to the employee. The reimbursements are not subject to FICA and FUTA withholding.

The MERP will cover virtually all of the employee’s out of pocket expenses. The bottom line is that the employee has a stronger benefit at a lower personal cost as does the law firm.

One of the things that you owe yourself and employees is to see how Obamacare affects you. If you want to see an analysis for your firm, drop me a line.

Remember to count your blessings today!

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A Question for Financial Advisors

With two months left in the tax year, most business owners and taxpayers have a pretty good idea what they have already made in 2013 and what they will make in the balance of the year. The question is what are you doing to help your clients reduce and defer taxation on their 2013 income?  The other question is what can your clients expect their CPAs to come up with in terms of solutions and tax reduction idea generation? Historically, don’t expect much in this area.

As a financial advisor whose income depends on the client taking action, it is frequently the advisor who is sufficiently “cojonudo” to get the client to take some action. The advisor’s life depends on it but so does the client’s unless the client is resolved to single-handedly take care of the national deficit by himself!  What are the big ideas that allow  the client to avoid writing a large check to Uncle Sam or get a refund on quarterly estimates?

Here are a few ideas to consider for your clients.

1. Family Investment LLC – If your client does not have a business, this is a way to create one. This is a valid business purposes for both state and federal tax purposes. Here are a few things to do with the Family LLC once you have it set up.

A. Family Defined Benefit Plan – The client pays himself a management fee and the spouse a management fee. Create a defined benefit plan, profit sharing plan and 401(k) plan. These plans will allow the client to make tax deductible contributions into these qualified retirement plans. If the client works for “The Man” and has W-2 income, these plans are separate from the employer’s plan except for the 401(k). This strategy can convert taxable investment income and consulting income as an independent contractor into tax deductible contributions and tax deferred income. The contributions might even create a net operating loss which may be carried back three years and forward indefinitely. Generally, the you can use the NOL if it does not exceed the taxpayer’s basis in the LLC.

B. Charitable Contributions – The client can create a donor advised fund and contribute a non controlling interest in the LLC to the donor advised fund. The client at this stage of the year will receive a deduction up to 50 percent of AGI as the LLC interest will be short term capital gain property. The client will retain management control over the LLC assets as the managing member and control the amount and timing of LLC distributions to his donor advised fund. The LLC income will be income and estate tax free to the extent of the donor advised fund’s ownership interest in the LLC. Asset protection benefits as well.

2. Discriminatory Defined Benefit Plan – Yes I have been pontificating the virtues of this plan. It works for young business owners as well as old business owners. A defined benefit plan contribution exceeds the value of the maximum defined contribution at any age. In the first year, the client can make a double contribution into the Plan. Here’s the story. Your client excludes the employees from participation through an arrangement that has the employees covered under a collective bargaining agreement. The business owner can cover himself, spouse and other highly compensated employees without including the employees. The benefit is very significant. The worries about unionized employees are greatly exaggerated unless your client is running a coal mining operation.

3. Health Care – Drop the group coverage today (not tomorrow). Most rank and file employees will qualify for tax subsidies on the exchange. Yes, once it is working and they can sign up. The employees and employer will save alot of money. The business owner will set up a medical expense reimbursement plan. This strategy works at any level. The small business owner may save himself $5-10,000 per month!

The business owner can take the savings and contribute more money into the discriminatory defined benefit plan outlined above. Quit moaning and groaning about Obama Care. Your Congressman tried 40 times to defund and repeal the law. However, it is the law of the land. Spend your time thinking about how to maximize it for your clients.

I work with a third party administrator that specializes in this strategy.

Remember to count your blessings to day.

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Nowotny knows Squat! – Small Business Owners and Obama Care

I was a pretty good powerlifter in my youth and later as an old man. Powerlifiting involves three different lifts – the squat, the bench press and the deadlift. Even as an old man, my deadlift and squat at age 52 were almost as good as they were at age 22. So it may be said that I know “squat” and maybe not much about anything else. It certainly was true about Obama Care.

After the Supreme Court challenge, I determined that Obama Care would be the law of the land until the Republicans got the “ball” back. However, it seems that every time the Democrats throw them the ball, the Republicans throw it back. The plot continues to thicken with the implementation of Obama Care. Personally, I don’t think that I have heard as much propaganda from either side. It seems that “Double Speak” instead of English is the official language of the federal government. With all of the technological genius in this country, why do we need a Canadian firm to build the healthcare website? Why do we need to shut down the government over health insurance?  So many questions, so few answers. 

One thing is certain, it is the law for now and the best strategy for a small business owner is to understand and make it work for your advantage. My recommendation for the business owner with less than 50 employees all is to drop their group health insurance all together and allow employees to pick up individual insurance on the health exchange and qualify for healthcare subsidies. The employer can set up a medical expense reimbursement plan (MERP) to cover the employee for any out of pocket expenses up to a determined limit. 

If the cost of group family coverage for Juan Fernandez in the Bronx is $1600 per month for a family of four, and the company is paying $1000 for the employee’s coverage, what is it going to cost with individual coverage? Juan and his wife Lourdes are both 40 and have two minor children and earn $60,000 per year. The cost of coverage for Juan and his family on a Bronze Plan is $2,237 per  or less than $200 per month after applying nearly $8,250 in government subsidies. Juan’s employer will no longer face an annual premium expense of $770,000 per year for its 40 employees ($19,200 annually per employee). Instead the company will reimburse every employee for $5,000 of unreimbursed medical expenses annually from its MERP.  These payments will be tax deductible and will not subject to FICA or FUTA withholding or taxable to the employee. The maximum out of pocket for the employer is $200,000. 

What is wrong with that picture?  I am not certain when the “put me out of business part” takes effect. The business owner eliminates an annual premium expense of nearly $750,000 per year and provides a reimbursement program to keep employee’s out of pocket expenses at a reduced level. The company can provide reimbursement for MDs that are out of network and not part of the new network of providers. The employee will have two medical cards – one for the new individual coverage and one for the MERP. 

In life when you are dealt lemons, we are told to  make lemonade. We may not like the Affordable Care Act aka Obama Care but it is the law of the land. From the looks of it for the small business owner, the “bark” may be far worse than the “bite”

Remember to count your blessings today!

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My Latin Thing – A few more “Beneficios” for Living in the PR

I grew up in the Panama Canal Zone (CZ) where my family lived for almost 25 years. It was a good life. Like most “gringos” living in the I did not bother to learn Spanish. My mother and brother spoke it very well. Instead, I was a fine high school Latin student.

When I got to West Point and realized what a poor engineering student I was compared to everyone else, I realized that I needed to find a subject that I could get “A”s into to balance out the “D”s. I took a double concentration in Spanish and Portuguese. I went to sleep one night and woke up the next day speaking Spanish and Portuguese.

I got my Latin Thing before that when I discovered Latin music and the Fania All Stars at the age of 16. I have never lost the Latin groove over all of the years. I am more familiar with Willie Colon then U2. In fact, one of my big regrets was making a decision to see Gato Barbieri over the Fania All Stars in Madison Square Garden in college. I did meet Celia Cruz though while living in Miami. 

When it comes to taxes, may “Americanos” are finding their Latin thing. Many taxpayers have thought about living in Central America or Ecuador among places. The problem is that none of the places has any tax advantage. I have written a number of times about the benefits of PR residency. It is the only place where a taxpayer that becomes a PR resident can avoid U.S. taxation (and PR taxation). Of course, the “diablo” is in the details. 

There are a few other things to consider – (1) FBAR reporting does not apply to your PR bank and investment accounts. (2) Form 8938 would not apply to your PR bank and investment accounts. (3) PR like Florida has an unlimited homestead exemption like Florida. What if former baseball commissioner Bowie Kuhn had gone to the PR instead of Florida? He could have become the Commissioner of the winter pro league in the PR. The New York Times reported in the early 1990’s that Bowie Kuhn, the former Major League Baseball Commissioner, had sold his $1.2 million New Jersey home and within weeks had bought a similar estate in Florida to shield his assets before then filing for bankruptcy. He could have been El Rey del Beisbol!  

It is one more reason why the PR may be the new Florida. When you generally compare the cost of living in  the PR versus most places, the PR has a lower cost of living by a decent margin. The cost of housing or rents may be 50 percent lower than most places in the U.S. 

Take a look at it!  It may worth your while. 

Also, before I go, don’t forget to count your blessings!


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If I were a Rich Man

I have been frankly amazed how hedge fund and private equity fund managers have been able to dodge the Silver Bullet when it comes to changes in the taxation of carried interest. Just when you start to count them out, they survive to live another day. The deferral of offshore carried interest may gone – IRC Sec 457A – or has it?

Most hedge fund managers live in states with high income tax rates – California, New York, New Jersey and Connecticut. Wealthy hedge fund managers have star appeal now like rock stars, professional athletes and entertainers. All of this makes them the perfect target for any and all litigation. Most state laws and the federal bankruptcy code allow someone to keep the food on their table and clothes on their back but not much more. Sometimes fast women and cars are just too much trouble.

The proliferation of interest in the use of self-settled trusts in Delaware, Nevada, and South Dakota for asset protection purposes may also have some significant income tax benefits for state income tax purposes. With the top marginal bracket up to 10-12 percent in some states, this is important planning. A hedge fund manager adopting this planning can legally avoid state income taxation on the investment income in his fund and protect himself from creditor attack using the same strategy. 

Why wouldn’t every principal in a hedge fund or private equity fund that is a limited partner in his or her own fund do this type of planning ?  The tax and legal authority from both an income and estate tax planning perspective is sound. Someone needs to be the messenger because chances are your CPA or business attorney haven’t mentioned this. 

Operators are waiting to take your call!  Before I forget, don’t forget to count your blessings today. 

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Discriminatory Defined Benefit Plan – The Certain Way to Reduce Taxes for the Business Owner in 2013

Chances are you have not been able to focus on your client’s 2013 taxes until they filed their 2012 taxes. Chances are also pretty good that your clients just filed your 2012 taxes this past week. The question is with two and half months remaining in the year, what are you going to do to reduce your client’s tax burden in 2013? If you ask yourself, when was the last time my client’s CPA provided him with a tax idea that saved the client any money in taxes, you may be not be able to think that far back?

Here is an idea to consider without raising the eyebrows of our friends at the IRS – a discriminatory defined benefit plan. Ordinarily, the “discriminatory” part would raise the eyebrows except for the way that we are going to it is right from the IRS playbook – the Internal Revenue Code. If you business owner clients or a professional practice, with 20 or fewer employees than this strategy is for you. You can set up a defined benefit plan and exclude the rest of the company employees from participation in the Plan. Additionally, the business owner can still participate in a 401(k) and profit sharing plan. in many cases a defined benefit plan will allow the business owner to make tax deductible contributions that are 3-5 times the defined contribution limit. If the level of deduction is still not enough, the business owner can add the spouse to the plan and double the benefit.

The magic is found in IRC Sec 410(b)(3)(A) of the Internal Revenue Code. I have created a turn key solution designed to maximize this solution. I have been ranting and raving about this for sometime already. The same strategy allowed a financial advisor to lead a major life insurer in sales for 15 years in a row. If it is good enough for him, why isn’t good enough for you?

Unless you and your clients are singlehandedly trying to resolve the federal deficit on your own, you should be calling me to get a head start on how this strategy works and the details for implementation. 

Drop me a line and we can do a short webinar to bring you up to speed. Happy hunting!

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Welfare Benefit Trusts and Long Term Care Planning

It is no secret that multi-employer welfare benefit trusts under IRC 419A(f)(6) suffered a terrible beating at the hands of the IRS in what has been years of tax audits. Inevitably, the life insurance industry likes to find ways to sell life insurance. Better yet, it likes to sell life insurance with pre-tax dollars. Nothing wrong with that. However, sometimes the forest gets lost between the trees, i.e. the legislative purpose and planning purposes of these trusts gets lost in the process 

As I look at single employer plans under IRC Sec 419(e) or VEBAs (what ever happened to these?),these  plans have largely avoided the audit lottery by focusing  on post retirement medical benefits. What exactly is that? Isn’t that something that large corporations worry about particularly under-funding?

After the federal government shutdown which was mostly about Obamacare, healthcare is suddenly very relevant. Lost in the translation is the discussion about long term care costs such as nursing home. the long term care insurance market missed the mark and many insureds have discovered that their coverage was underwritten at the time of claim. 

People are living longer but the quality of life is diminished. Alzheimer’s has reached epidemic proportions. How does the business owner pay for his wife’s nursing home care without spending every dime that he earned over forty years and leave his children an inheritance? Nursing home costs around the country vary from $90,000-120,000 per year. Alzheimer’s patients frequently outlive the healthy spouse. Medicaid is virtually impossible to qualify for and most people do not attack the funding problem early enough. Wouldn’t be nice to pre-fund on a pre-tax basis?

At the same time, children with autism and other related illnesses has also become an epidemic. The issues of qualifying for Medicaid exist for this problem as well especially if you are wealthy or moderately wealthy. Every parent worries about their special needs child outliving the parents and not becoming a burden on the siblings. How does a parent set aside money? it is certainly cheaper if it can be done on a pre-tax basis. 

The welfare benefit trust – single employer plan under IRC Sec 419(e) or VEBA has huge planning relevance for these issues and may present an excellent pathway towards providing a solution on a pre-tax basis. Financial advisors and insurance agents no longer need to stretch to discover a legitimate planning basis to sell life insurance in these plans. Of course, there is no problem using life insurance as a funding vehicle! Contributions need to be determined using reasonable actuarial assumptions. The funding numbers need to be real!

I will be writing more about this in the future. As we reach year end, this is a plan to consider. 

Don’t forget to count your blessings today! 


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